Diamonds Are A Sham And It's Time We Stop Getting Engaged With Them

American males enter adulthood through a peculiar rite of
passage - they spend most of their savings on a shiny piece of
rock.

They could invest the money in assets that will compound
over time and someday provide a nest egg.

Instead, they trade that money for a diamond ring, which
isn’t much of an asset at all. As soon as you leave the jeweler
with a diamond, it loses over 50% of its value.

Americans exchange diamond rings as part of the engagement
process, because in 1938 De Beers
decided that they would like us to. Prior to a
stunningly successful marketing campaign 1938, Americans
occasionally exchanged engagement rings, but wasn’t a pervasive
occurrence.

Not only is the demand for diamonds a marketing invention,
but diamonds aren’t actually that rare. Only by
carefully restricting the supply has De Beers kept the price of a
diamond high.

Countless American dudes will attest that the societal obligation
to furnish a diamond engagement ring is both stressful and
expensive. But here’s the thing - this obligation only exists
because the company that stands to profit from it willed it into
existence.

So here is a modest proposal: Let’s agree that diamonds are
bullshit and reject their role in the marriage process. Let’s
admit that as a society we got tricked for about century into
coveting sparkling pieces of carbon, but it’s time to end the
nonsense.

The Concept of Intrinsic Value

In finance, there is concept called intrinsic value. An asset’s
value is essentially driven by the (discounted) value of the
future cash that asset will generate. For example, when Hertz
buys a car, its value is the profit they get from renting it out
and selling the car at the end of its life (the “terminal
value”). For Hertz, a car is an investment. When you buy a car,
unless you make money from it somehow, its value corresponds to
its resale
value. Since a car is a depreciating asset, the amount of
value that the car loses over its lifetime is a very real expense
you pay.

A diamond is a depreciating asset masquerading as an investment.
There is a common misconception that jewelry and precious metals
are assets that can store value, appreciate, and hedge against
inflation. That’s not wholly untrue.

Gold and silver are
commodities that can be purchased on financial markets. They can
appreciate and hold value in times of inflation. You can
even hoard gold under your bed and buy gold coins and bullion
(albeit at a ~10% premium to market
rates). If you want to hoard gold jewelry however,
there is typically a 100-400% retail markup so
that’s probably not a wise investment.

But with that caveat in mind, the market for gold is fairly
liquid and gold is fungible - you can trade one large piece of
gold for ten smalls ones like you can a ten dollar bill for a ten
one dollar bills. These characteristics make it a feasible
potential investment.

Diamonds, however, are not an investment. The market for
them is neither liquid nor are they fungible.

The first test of a liquid market is whether you can resell a
diamond. In a famous piece published by The Atlantic in 1982, Edward
Epstein explains why you can’t sell used diamonds for anything
but a pittance:

Retail jewelers, especially the prestigious Fifth Avenue stores,
prefer not to buy back diamonds from customers, because the offer
they would make would most likely be considered ridiculously low.
The “keystone,” or markup, on a diamond and its setting may range
from 100 to 200 percent, depending on the policy of the store; if
it bought diamonds back from customers, it would have to buy them
back at wholesale prices.

…

Most jewelers would prefer not to make a customer an offer that
might be deemed insulting and also might undercut the widely held
notion that diamonds go up in value. Moreover, since retailers
generally receive their diamonds from wholesalers on consignment,
and need not pay for them until they are sold, they would not
readily risk their own cash to buy diamonds from customers.

When you buy a diamond, you buy it at retail, which is a 100% to
200% markup. If you want to resell it, you have to pay less than
wholesale to incent a diamond buyer to risk their own capital on
the purchase. Given the large markup, this will mean a
substantial loss on your part. The same article puts some numbers
around the dilemma:

Because of the steep markup on diamonds, individuals who buy
retail and in effect sell wholesale often suffer enormous losses.
For example, Brod estimates that a half-carat diamond ring, which
might cost $2,000 at a retail jewelry store, could be sold for
only $600 at Empire.

Some diamonds are perhaps investment grade, but you probably
don’t own one, even if you spent a lot.

The appraisers at Empire Diamonds examine thousands of diamonds a
month but rarely turn up a diamond of extraordinary quality.
Almost all the diamonds they find are slightly flawed, off-color,
commercial-grade diamonds. The chief appraiser says, “When most
of these diamonds were purchased, American women were concerned
with the size of the diamond, not its intrinsic quality.” He
points out that the setting frequently conceals flaws, and adds,
“The sort of flawless, investment-grade diamond one reads about
is almost never found in jewelry.”

As with televisions and mattresses, the diamond classification scheme is
extremely complicated. Diamonds are not fungible and
can’t be easily exchanged with each other. Diamond professionals
use the 4 C’s when classifying and pricing diamonds: carats,
color, cut, and clarity. Due to the complexity of these 4
dimensions, it’s hard to make apples to apples comparisons
between diamonds.

But even when looking at the value of one stone, professionals
seem like they’re just making up diamond prices:

In 1977, for example, Jewelers’ Circular Keystone polled a large
number of retail dealers and found a difference of over 100
percent in offers for the same quality of investment-grade
diamonds.

So let’s be very clear, a diamond is not an investment. You might
want one because it looks pretty or its status symbol to have a
“massive rock”, but not because it will store value or appreciate
in value.

But among all the pretty, shiny things out there - gold and
silver, rubies and emeralds - why do Americans covet diamond
engagement rings in the first place?

A Diamond is Forever a Measure of your Manhood

“The reason you haven’t felt it is because it doesn’t exist. What
you call love was invented by guys like me, to sell nylons.”
-- Don Draper, Madmen

We like diamonds becauseGerold M. Laucktold us to. Until the
mid 20th century, diamond engagement rings were asmall and dyingindustry
in America. Nor had the concept really taken hold in Europe.
Moreover, with Europe on the verge of war, it didn’t seem like a
promising place to invest.

Not surprisingly, the American market for diamond engagement
rings began to shrink during the Great Depression. Sales volume
declined and the buyers that remained purchased increasingly
smaller stones. But the US market for engagement rings was still
75% of De Beers’ sales. If De
Beers was going to grow, it had to reverse the trend.

And so, in 1938, De Beers turned to Madison Avenue for help. They
hired Gerold Lauck and the N. W. Ayer advertising agency, who
commissioned a study with some astute observations. Men were the
key to the market:

Since “young men buy over 90% of all engagement rings” it would
be crucial to inculcate in them the idea that diamonds were a
gift of love: the larger and finer the diamond, the greater the
expression of love. Similarly, young women had to be encouraged
to view diamonds as an integral part of any romantic courtship.

However, there was a dilemma. Many smart and prosperous women
didn’t want diamond engagement rings. They wanted to be
different.

The millions of brides and brides-to-be are subjected to at least
two important pressures that work against the diamond engagement
ring. Among the more prosperous, there is the sophisticated urge
to be different as a means of being smart…. the lower-income
groups would like to show more for the money than they can find
in the diamond they can afford…

Lauck needed to sell a product that people either did not want or
could not afford. His solution would haunt men for generations.
He advised that De Beers market diamonds as a status symbol:

"The substantial diamond gift can be made a more widely sought
symbol of personal and family success — an expression of
socio-economic achievement.”

…

“Promote the diamond as one material object which can reflect, in
a very personal way, a man’s … success in life.”

The next time you look at a diamond, consider this. Nearly every
American marriage begins with a diamond because a bunch of rich
white men in the 1940s convinced everyone that its size
determines your self worth. They created this convention - that
unless a man purchases (an intrinsically useless) diamond, his
life is a failure - while sitting in a room, racking their brains
on how to sell diamonds that no one wanted.

With this insight, they began marketing diamonds as a symbol of
status and love:Movie idols, the paragons of romance for the mass
audience, would be given diamonds to use as their symbols of
indestructible love. In addition, the agency suggested offering
stories and society photographs to selected magazines and
newspapers which would reinforce the link between diamonds and
romance. Stories would stress the size of diamonds that
celebrities presented to their loved ones, and photographs would
conspicuously show the glittering stone on the hand of a
well-known woman.

Fashion designers would talk on radio programs about the “trend
towards diamonds” that Ayer planned to start. The Ayer plan also
envisioned using the British royal family to help foster the
romantic allure of diamonds.

Even the royal family was in on the hoax! The campaign paid
immediate dividends. Within 3 years, despite the Great
Depression, diamond sales in the US increased 55%! Twenty years
later, an entire generation believed that an expensive diamond
ring was a necessary step in the marriage process.

The De Beers marketing machine continued to churn out the hits.
They circulated marketing
materials suggesting, apropos of nothing, that a man
should spend one month’s salary on a diamond ring. It worked so
well that De Beers arbitrarily decided to increase the suggestion
to two months salary. That’s why you think that you need to spend
two month’s salary on a ring - because the suppliers of the
product said so.

Today, over 80% of women in the US receive
diamond rings when they get engaged. The domination is complete.

A History of Market Manipulation

What, you might ask, could top institutionalizing demand
for a useless product out of thin air? Monopolizing the supply of
diamonds for over a century to make that useless product
extremely expensive. You see, diamonds aren’t really even that
rare.

Before 1870, diamonds were
very rare. They typically ended up in a Maharaja’s crown or a
royal necklace. In 1870, enormous deposits of diamonds were
discovered in Kimberley, South Africa. As diamonds flooded the
market, the financiers of the mines realized they were making
their own investments worthless. As they mined more and more
diamonds, they became less scarce and their price dropped.

The diamond market may have bottomed out were it not for an
enterprising individual by the name of Cecil
Rhodes. He began buying up mines in order to control the
output and keep the price of diamonds high. By
1888, Rhodes controlled the entire South African diamond
supply, and in turn, essentially the entire world supply. One of
the companies he acquired was eponymously named after its
founders, the De Beers brothers.

Building a diamond monopoly isn’t easy work. It requires a
balance of ruthlessly punishing and cooperating with competitors,
as well as a very long term view. For example, in 1902,
prospectors discovered a massive mine in South Africa that
contained as many diamonds as all of De Beers’ mines combined.
The owners initially refused to join the De Beers cartel, joining
three years later after new owner Ernest Oppenheimer recognized
that a competitive market for diamonds would be disastrous for
the industry:

Common sense tells us that the only way to increase the value of
diamonds is to make them scarce, that is to reduce production.

Here’s how De Beers has controlled the diamond supply chain for
most of the last century. De
Beers owns most of the diamond mines. For mines that they don’t
own, they have historically bought out all the diamonds,
intimidating or co-opting any that think of resisting their
monopoly. They then transfer all the diamonds over to the Central
Selling Organization (CSO), which they own.

The CSO sorts through the diamonds, puts them in boxes and
presents them to the 250 partners that they sell to. The price of
the diamonds and quantity of diamonds are non-negotiable - it’s
take it or leave it. Refuse your boxes and you’re out of the
diamond industry.

For most of the 20th century, this system has controlled 90% of
the diamond trade and been solely responsible for the inflated
price of diamonds. However, as Oppenheimer took over leadership
at De Beers, he keenly assessed the primary operational risk that
the company faced:

Our only risk is the sudden discovery of new mines, which human
nature will work recklessly to the detriment of us all.

Because diamonds are “valuable”, there will always be the
risk of entrepreneurs finding new sources of diamonds. Although
controlling the discoverers of new mines often actually meant
working with communists. In 1957, the Soviet Union
discovered a massive deposit of diamonds in Siberia. Though the
diamonds were a bit on the smallish side, De Beers still had to
swoop in and buy all of them from the Soviets, lest they risk the
supply being unleashed on the world market.

Later, in Australia, a large supply
of colored diamonds was discovered. When the mine refused to join
the syndicate, De Beers retaliated by unloading massive amounts
of colored diamonds that were similar to the Australian ones to
drive down their price. Similarly, in the 1970s, some Israeli
members of the CSO started stockpiling the diamonds they were
allocated rather than reselling them. This made it difficult for
De Beers to control the market price and would eventually cause a
deflation in diamond prices when the hoarders released their
stockpile. Eventually, these offending members were banned from
the CSO, essentially shutting them out from the diamond business.

In 2000, De Beers announced that they were
relinquishing their monopoly on the diamond business. They even
settled a US Antitrust lawsuit related to price fixing industrial
diamonds to the tune of $10 million (How generous! What is that,
the price of one investment banker’s engagement ring?).

Today, De Beers hold on the industry supply chain is less
strong. And yet, price continue to rise as new deposits
haven’t been found recently and demand for diamonds is increasing
in India and China. For now, it’s less
necessary that the company monopolize the supply chain because
its lie that a diamond is a proxy for a man’s worth in life has
infected the rest of the world.

Conclusion

“I didn’t get a bathroom door that looks like a wall by being bad
at business” -- Jack Donaghy,30 Rock

We covet diamonds in America for a simple reason: the company
that stands to profit from diamond sales decided that we should.
De Beers’ marketing campaign single handedly made diamond rings
the measure of one’s success in America. Despite its complete
lack of inherent value, the company manufactured an image of
diamonds as a status symbol. And to keep the price of diamonds
high, despite the abundance of new diamond finds, De Beers
executed the most effective monopoly of the 20th century. Okay,
we get it De Beers, you guys are really good at business!

The purpose of this post was to point out that diamond
engagement rings are a lie - they’re an invention of Madison
Avenue and De Beers. This post has completely glossed over the
sheer amount of human suffering that we’ve caused by believing
this lie:conflict diamondsfunding wars, supporting
apartheid for decades with our money, and pillaging the earth to
find shiny carbon. And while we’re on the subject, why is it
thatwomen need to be asked and
presented with a ringin order to get married? Why
can’t they ask and do the presenting?

Diamonds are not actually scarce, make a terrible investment, and
are purely valuable as a status symbol.

Diamonds, to put it delicately, are bullshit.

This post was written by Rohin Dhar. He has a very patient
wife. Follow him on Twitter here or Google.